U.S. stock market heads into another volatile week

Economic data, stronger dollar and price of oil all factors ahead of FOMC

By

KateGibson

NEW YORK (MarketWatch) -- U.S. stocks could be in for another temperamental week as market participants track the price of oil and try to gauge the odds of whether the Federal Reserve will resort to interest-rate hikes in coming months to ward off inflation.

"Next week is kind of a no-man's land, where we're waiting on the Fed. And, we're still seeing high energy prices, so I expect to see a lot of volatility but probably not a lot of direction," said Jeffrey Kleintop, chief market strategist at LPL Financial.

Major U.S. stock indexes closed the books on a turbulent week with solid gains on Friday after government data and a decline in oil prices offset worries about the impact of escalating prices on consumers.

"We've got a lot of the key economic data under our belt now," said Kleintop of retail sales data and the Consumer Price Index, both of which helped bolster equities toward the latter part of last week.

Friday's action had the Dow Jones Industrial Average
DJIA, +0.72%
gaining 165.77 points, or 1.4%, to end at 12,307.35, up nearly 100 points, or 0.8%, for the week.

The S&P 500
SPX, +0.59%
climbed 20.16 points, or 1.5%, to settle at 1,360.03, nearly flat, or up 0.05%, from the prior Friday's close. The Nasdaq Composite
COMP, +0.50%
added 50.15 points, or 2.1%, to end at 2,454.50, giving the technology-laden index a weekly loss of 0.8%.

Treasury prices, which had their worst week since 2001, rebounded after Friday's data, reflecting declining worries about inflation. Read the Bond Report.

The consumer price index rose 0.6% in May, slightly higher than the 0.5% gain forecast. But excluding food and energy costs, prices rose 0.2%, in line with expectations. See full story.

'My take is we're at the point in the Main Street chapter book where we have to recognize there is indeed a villain, and that villain is inflation.'
Tim Speiss, Eisner LLP

"My take is we're at the point in the Main Street chapter book where we have to recognize there is indeed a villain, and that villain is inflation," said Tim Speiss, head of wealth management at Eisner LLP.

"The equities markets don't like this villain," Speiss added.

The quickening pace of inflation had reignited the debate over whether the Federal Reserve would reverse course after a series of cuts to its benchmark lending rate, which currently stands at 2%.

But the latest economic data and the strengthening dollar bolstered the idea that the Fed could take a more neutral stance as it attempts to protect the weak U.S. economy while contending with rising inflationary pressure.

Fed moves

While many experts said they do not expect any change in policy at the upcoming Federal Open Market Committee meeting June 24 and June 25, some are looking for the Fed to tighten in the months ahead, and economic data in the week ahead could be a factor.

"I think they will be raising rates, but I don't know how aggressively -- there are a lot of questions about the strength in the economy, particularly given high gas prices," said Kleintop.

On the economic data front, Monday brings a measure of manufacturing activity in the New York region, with the Empire State Index expected to weigh in at -1.0 from -3.2.

"We expect a similar level in June, that would suggest this region's manufacturing sector continues to perform much better than what would be expected during a typical recession," said Action Economics.

The data will help set the stage for forecasts from other surveys, including Thursday's Philadelphia Fed Index.

The economic calendar includes the producer price index, or PPI, on Tuesday, which is expected to jump 1.1%, with the core forecasted to rise at 0.2%, along with data on the embattled housing market, with data on May housing starts, building permits and home completions.

Also Tuesday, industrial production is likely to rise 0.2% for May, after a decline of 0.7% in April.

Wednesday is slated to bring an accounting of crude oil and gasoline supplies from the EIA, with the accounting likely to get more than the usual attention given the impact of rising energy prices on the overall U.S. economy.

And the government is scheduled on Thursday to deliver data on those filing for jobless benefits, while the Philadelphia Fed Index and leading indicators will also be disclosed.

"The economic outlook may be as murky as ever and risks in the financial system remains high, but it's quite possible that the lion's share of falling expectations will soon be behind us," said Ken Tower, chief market strategist at Covered Bridge Tactical LLC.

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